CitiGroup has downgraded its iron ore price guidance and now expects the commodity will drop into the $50 a tonne range next year, albeit briefly.
In a research note released today the bank says it now expects prices to average $74 a tonne in Q1, moving down to an average of $60 by the September quarter next year.
“We expect iron ore prices to fall into the $50s – We have downgraded our price forecasts…briefly dipping into the $50s – with annual averages of $65 in 2015 and 2016,” Citi said today.
Here’s the bank’s iron ore price forecast which shows a significant drop from previous expectations.
Macroeconomics analysis today indicated a $51 billion hole in the federal government’s budget, saying there are so many problems that red ink is all Australia should expect for the next ten years.
Treasurer Joe Hockey today blamed falling iron ore prices for increasing pressure on the government’s bottom line.
“Iron ore prices are between 30-40 per cent less than they were when we first made our forecasts in the budget, that has a direct impact on our budget bottom line, there is no doubt about that,” Hockey said on Adelaide Radio station 5AA today.
Iron ore’s selloff this year from over $100 a tonne to its current $75 a tonne for December delivery, has been largely driven by weak demand and deleveraging, Citi commodity strategist Ivan Szpakowski said in a research note today.
“While the first half of the year saw prices driven lower as supply increased, Q3’s selloff was driven by deteriorating demand and deleveraging of traders and Chinese mills, with prices now selling off on APEC and pollution driven steel production curtailments. We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness,” he said.
“We underestimated the speed at which prices would fall in the second half.”
He said a sustained iron ore price in the $60 range, which he sees much stronger cost support, could prompt significant supply cutbacks.
Heading into 2015, Citi is expecting an additional 140 million tonnes to hit the market. Rio Tinto is expected to increase export production by 54 million tonnes year-on-year, while Vale is expected to boost production 30 million tonnes and BHP is forecast to add another 15 million tonnes.
This is all happening at a time when Chinese domestic production and steel demand growth are predicted to fall which will put more pressure on prices.
Australia holds the position as one of the lowest cost iron ore producers globally and recent falls in the Aussie dollar have taken some of the pressure off the country’s higher cost producers.
However, Citi said if prices sit in the $60-$70 a tonne range for a sustained period companies like Atlas Iron, Arrium and Savage River could be among the Australian producers who cut production.